President Joe Biden wants to end the preferential U.S. tax treatment of investment income that has benefited the nation’s wealthy as he seeks to fund a sweeping new social-spending program. But he will need to overcome a major political hurdle in Congress to do so.
The White House plans to propose almost doubling the capital gains tax rate for those earning $1 million or more, to 39.6%, according to people familiar with the proposal. That wouldn’t affect many. Only about 0.32% of American taxpayers reported adjusted gross income of more than $1 million and capital gains or losses on their returns, according to Internal Revenue Service tax return data from 2018.
The move would send the top federal rate on the appreciation in assets sold by the rich as high as 43.4% when including a surtax to help pay for Obamacare. And it would upend a century-old precedent of under-taxing investment relative to wages and salaries.
Surging stock and property prices over the past year only strengthened the Biden team’s determination to follow through on campaign pledges to demand higher taxes from the best-off. The president is betting the initiative will be popular enough to win passage in Congress, where he can’t lose a single Democratic vote in the Senate and only a handful in the House, since Republicans are likely to be united in opposition.
Stocks dropped the most in more than a month on the news Thursday, with the S&P 500 Index closing down 0.9%, though futures trading Friday suggested some stabilization. Contracts on the index were up 0.1% as of 8:49 a.m. in New York.
“If a 1% fall in stock prices is all that you get from a really major increase in capital gains taxes that’s not a big problem,” Nobel economics laurate Paul Krugman said on Bloomberg TV. “Biden has an ambitious agenda” and to help pay for it, “some significant tax increases are going to be part of the story,” he said.
Biden campaigned on equalizing the capital gains and income tax rates for wealthy individuals, saying it’s unfair that many of them pay lower rates than middle-class workers.
The new marginal 39.6% rate would be an increase from the current base rate of 20%, the people said on the condition of anonymity because the plan is not yet public. A 3.8% tax on investment income that funds Obamacare would be kept in place, they added.
White House Press Secretary Jen Psaki, asked about the capital-gains plan at a press briefing Thursday, said, “we’re still finalizing what the pay-fors look like.” Biden is expected to release the proposal next week as part of the tax increases to finance social spending in the forthcoming American Families Plan.
Other measures that the administration has discussed include enhancing the estate tax for the wealthy. Biden has warned that those earning more than $400,000 a year can expect to pay more in taxes. The White House has already rolled out plans for corporate tax hikes, which go to fund the $2.25 trillion infrastructure-focused American Jobs Plan.
Republicans have insisted on retaining the 2017 tax cuts implemented by former President Donald Trump, and argued that the current capital-gains framework encourages saving and promotes future economic growth.